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[This post was written in collaboration with Shawna Baskins and Joseph Riley.]

In the past few years university-based researchers have published a substantial amount of explorative work on MMORPG economies – the most complex virtual economic system that exists in games. In this post we take a quick look at some of the interesting research papers from the hallowed halls of academia and beyond. We will not be going into substantial depth, but provide a number of links for further self-exploration. It is well worth it.

Virtual economies are an important feature for games. This is true not only for MMOGs, but a key component of the design and management of freemium and other types of games, as well. In essence, games have had in-game economies since the first NPC merchant, or purchasable power-up at the dawn of game-time. The importance of virtual economies to games means that this is a topic of intense scrutiny both in the industry and in the university-based game research environment, notably in recent years.

In the game analytics domain we often talk about virtual economies in the multitude of different freemium games, but the most complex virtual economies are found in MMORPGs, where for almost two decades, things have just gotten more and more complex.

Virtual economies can vary greatly in complexity. On one side of the spectrum, we have the economy of Candy Crush Saga, where users can buy “boosters”, but such boosters will have no effect on other players. In such freemium games, we often talk about core loops. These describe the production and drain of resources in a game, focusing on the interplay between soft and hard currencies.

The core loop of the virtual economy of The Simpsons: Tapped Out is fairly typical for a city building game. Real money consumption speeds up soft currency production. Soft currency production offers diminishing returns, which encourages more real money consumption. Many kinds of items are needed to maximize productivity gains, and every resource has a built-in sink. The system is designed optimally to soak in hard currency (source).

In comparison, a traditional RPG like Baldur’s Gate or The Witcher can include players generating assets as they play the game, and expending these assets on items and character improvements. RPGs can also feature object creation systems with gradual unlocking of higher-tier items. While games sold under a retail model traditionally did not include the ability for players to spend additional real-world money to purchase virtual items, nowadays, it is increasingly common to have ways for players to buy items in games that in the past would not have had this feature, e.g. DLC equipment packs for the Mass Effect-series.

At the other side of the spectrum, there are majorly commercial, subscription/F2P-driven MMOGs that can operate with complex, multilayered economic systems, with multiple currencies and trading systems, providing players with a variety of ways to generate and spend their in game, and real-life resources.

A core loop model cannot account for the kinds of economies that exist in contemporary MMORGPs, however. Integrated virtual economies, combined with social and combat mechanisms, form the backbone of MMOGs. Virtual economies also serve as monetization mechanisms for many of these games, increasing the need for right functionality to make them balanced for all the stakeholders involved – not the least the players.

What is a virtual economy?

First, let us define a virtual economy (skip this section if you have ever played an MMORPG). A definition based loosely on the writings of Isaac Knowles and Edward Castronova, two of the researchers working with virtual economies, states that it is a set of currencies, goods and services that can be collected, used and traded in the virtual world. Typically, this would involve the user’s ability to produce these goods, as well as a marketplace where they could be traded. Not all virtual economies will have these features, but they do seem to be common in MMOGs.

Trading is a general component of MMOG economies. The trade, i.e. exchange of items between players, is covered by rules established by the game company, and usually takes place in a designated venue, such as an auction house or bazaar. Trading systems can take the form of in-game auctions as well. These are similar to the real-life auction houses, such as eBay, with the main difference being that in-game auctions rarely contain information asymmetries between buyers and sellers.

An infographic from the beta weekend of the MMORPG Guild Wars 2, showing a breakdown of different economic indicators, e.g. the distribution of wealth and currency exchanges. Note the breakdown at the top showing sources of gold earned and the multiple sources of income that exists in a contemporary MMORPG (source).

Research on virtual economies

In the game industry, MMOG developers have taken the step of professional economists (also here) to ensure correct design and management of virtual economies, and avoid economies that run out of control.

The interest in studying virtual economies has also emerged in the academia, but for a different reason: while the game industry is looking at the virtual economies from the monetization and user satisfaction perspectives, for the academics these economies represent an experimental playground for studying human behavior, testing and evaluating economic theories and dissecting economic systems.

This sometimes leads to interesting results, for example showing how real-world economic processes are copied in MMORPG economies, and how design can disrupt them; or the details of faucet-drain mechanics.

One of the earliest and seminal pieces of work focusing on auction houses and virtual economies did not originate in the academia, but in the industry. It was released by Simpson, on Ultima Online. He described an environment with hundreds of virtual items being exchanged via virtual auction houses, and described the macroeconomic design built into UO from the onset to facilitate economic flow. But he also highlighted non-player controlled economy, which led to Ultima Online experimenting with player-run actions. These new, more open economies formed the foundation of the feature in today’s MMOGs.

Whether real world economic behaviour is reflected in the virtual world remains an open question. One of the main contributors to the field, Edward Castronova, argued that integrating real-life economics theories into the sphere of game worlds must be done carefully. This is due to the macroeconomic outcome of the virtual world being largely influenced by design structure, parameters of which can be different from those in the real world. Castronova’s work also noted that an aspect, which makes adoption of real world aggregates easier, is the items’ relevance to equivalents in the real world – i.e. food, furniture, etc.

Two other noteworthy studies focused on the macroeconomic behaviour in the virtual worlds. Morrison and Fontenla, studying the economic behaviours of the player community across eight World of Warcraft servers, noted that price convergence occurred at all of them. Lohdonvirta, used virtual item sales records to identify attributes that drive purchase decisions in the virtual worlds.

In relation to the virtual world parameters being different from those in the real world, Williams has reported differences in the representations of gender, race and age in games as opposed to real world populations. Another work, contributed by Szell and Thurner, noted that although there is some evidence that game societies might mimic those in the real world, for the most part, it still remains an unresolved issue how social networks operate to influence in-game economies.

Sony Online Entertainment started sharing data from EverQuest II with a team of US-based researchers a few years ago, which has led to dozens of publications. The work from the Virtual Worlds Observatory includes dissections of player behaviour, techniques for player profiling, social network analysis, activity analysis, etc., and is well worth looking into.

Critique against the economics research in academia has been leveraged by economists in the industry. For example, Varoufakis (see also here) noted that studies often imposed their own prejudices on virtual worlds rather than genuinely trying to extract new knowledge. Integrating game design in economic studies has also been advocated by Castronova, who suggested that “code is law”. This means that, for example, macroeconomic outcomes in a virtual world are largely explained by the design structure, the parameters of which can be different than the real world’s, and thus, care must be taken when integrating real-life economics theories and models into the domain of game worlds. Such models otherwise form powerful tools for constructing and managing virtual economies.

Summarising

Academic research in games can be interesting because it does not need to justify itself in terms of – for example – driving a game’s revenue. This means that blue sky/explorative topics can be investigated, and this is one of the drivers behind the increasing collaboration between university researchers and game companies within the area of game analytics.

This post is by no means a complete overview of all academic work on the subject of virtual economies, nor the many interesting and useful presentations from GDC and elsewhere, and readers are encouraged to delve deeper via the links provided.

On a final note, it is unfortunate that much academic research is hidden behind paywalls, as scientific publishers charge for access to research publications. However, much can be found via the personal websites of academics. Furthermore, in a pinch, visiting a university library will grant access to the material.

[This post was written in collaboration with Shawna Baskins and Joseph Riley. Cross-posted from the Game Analytics blog]